SBA Issues More New Guidance on PPP Loan Forgiveness

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In a new FAQ published on August 4, 2020 (found here), SBA clarified some additional points from the use of scanned documents to support the application to the forgiveness eligibility of costs incurred or paid during the chosen covered period. As always, PilieroMazza wants to bring this to the attention of all of our clients as we know many firms are currently preparing their forgiveness applications and these may be critical updates.

General Loan Forgiveness

  1. If you are a sole proprietor/1099 or have no employees, you automatically qualify for the Loan Forgiveness EZ form (Form 3508EZ)
  2. You are allowed to use scanned copies of documents, e-signatures, or e-consent forms to support the forgiveness application. Wet signatures and the like are not required. If there is no e-signature function available and you have to use a scanned copy of a document, lenders are likely to require some other proof that you are the person signing, so be prepared for that.
  3. You do not have to make any payments on the loan as long as you submit your forgiveness application within 10 months after the completion of the Covered Period. However, interest will continue to accrue, and if you do not get full forgiveness of the loan, you must pay back the unforgiven principal and interest on the loan prior to the maturity date of your loan. It is important to note that lenders are responsible for telling you whether your loan has been forgiven.

Loan Forgiveness Payroll Costs

  1. All costs incurred or paid during the chosen Covered Period (either the standard Covered Period or the Alternative Payroll Covered Period) are forgivable. Thus, if you received your loan on May 5 but had payroll running from April 23 to May 7 and paid that full payroll amount on May 7, the entire payroll can be included in the forgiveness application because it was paid during the Covered Period. Similarly, if your Covered Period expires on July 30 and you have a payroll running from July 23 to August 6, which is paid August 6, all payroll incurred from July 23 to July 30 but paid on August 6 is also eligible for forgiveness. SBA did this to ensure that all costs are captured so don’t miss out on forgiveness!
  1. For clarity, the Covered Period is defined as either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. For example, if the borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.
  1. The Alternative Payroll Covered Period is for borrowers with a biweekly (or more frequent) payroll schedule, the 24-week (168-day) period (or, for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP loan disbursement date (i.e., the “Alternative Covered Period”). For example, if the borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.
  1. When calculating the amount of payroll eligible for forgiveness, you may include all payments made, including lost tips (if paid by the employer), lost commissions (again, if paid), bonuses, other forms of incentive pay like hazard pay, etc. So long as the amounts are actually paid by the employer to the employee, then the payments are eligible for forgiveness. This is all still subject to the $100K annualized cap.
  1. For healthcare expenses, only those expenses paid by the employer are eligible for forgiveness. If the employee contributes to their own healthcare expenses, those amounts are not eligible. However, you could pay the employee a bonus to cover such amounts and the bonus would be forgivable. Note that may have tax implications on the employee, however.
  1. For retirement benefits the same applies. Any retirement benefits paid by the employer during the Covered Period are eligible for forgiveness.
  1. For owners seeking forgiveness for amounts paid to themselves, it is a bit complicated. Generally speaking, if you are using an 8-week covered period, you are eligible to have up to $15,385 of payments to yourself forgiven. If you are using the 24-week period, that maximum amount increases to $20,833. This total amount is a cap across all businesses that the owners own. So even if you have 10 businesses that received PPP Loans, the caps above still apply in the aggregate of all payments to you from all 10 businesses…not per business. Also, this is the maximum for owners who were being paid more than $100K a year. For owners making less, then you need to run the calculation based upon 2.5 months of your 2019 self-employment pay. Note that these calculations are different depending on the type of business you have (C-Corp, S-Corp, Partnership, LLC, etc). Thus, make sure you carefully review the FAQ linked above or talk to your legal advisor or accountant prior to submission of the application for forgiveness. You cannot simply use the caps noted above without regard for your specific facts and circumstances.

Loan Forgiveness Non-Payroll Costs

  1. All non-payroll costs that are eligible for forgiveness (covered rent/utilities/mortgage) which are paid or incurred during the Covered Period are eligible for forgiveness. Just like with payroll, as long as you paid the costs during the period or you incurred the costs during the period, you may seek forgiveness for the amounts. If you had a utility bill that ran from April 1 to June 30 and your Covered Period ran from May 5 to June 30 and you paid the bill on June 30, you are eligible for forgiveness for that total bill, even the amounts prior to May 5. If you paid the bill on July 15, then you would be eligible for forgiveness for all amounts from May 5 to June 30, but not the proportion of the billed amounts incurred from April 1 to May 4.
  1. It is also important to note that if you use the Alternative Payroll Covered Period mentioned above, that period does not apply to non-payroll costs. For non-payroll costs, you have to follow the standard Covered Period when calculating forgiveness.
  1. If you signed a lease renewal or refinanced a mortgage after February 15, those leases and mortgages are still subject to forgiveness as long as the lease or mortgage for the same property existed prior to February 15 and it was not a new lease or mortgage entirely. Thus, if your lease expires on February 17, just because that is technically a “new” lease does not mean it is no longer subject to forgiveness because it is simply an extension of an existing lease. The same is true for mortgages and the like that are refinanced.
  1. For utilities, all amounts paid to the utility company are eligible for forgiveness. This includes fees, supply charges, distribution charges, taxes, etc. So, borrowers do not have to parse their bills to determine what is eligible or forgiveness.

Loan Forgiveness Reductions

  1. FTE Reductions
    1. SBA reiterated that if you offer to rehire an employee, it is in writing, and you document the employee’s refusal to accept the job, that will not impact your FTE counts for forgiveness reduction purposes. Note also that SBA may require evidence that you properly informed the state unemployment agencies of the rejection of the employment offer and that may cause the employee to lose unemployment benefits. However, if you do not give proper notice to the state authorities, SBA may use that as a basis to reject your claim of attempted rehire and, in turn, reduce your eligible forgiveness amount under PPP.
    2. Similarly, if you are unable to find similarly qualified individuals to fill open positions and you can document that you have taken commercially reasonable steps to find and hire such similarly qualified individuals. 
    3. SBA clarified that the FTE reductions include all employee positions, even those making more than $100K. You need to look at your entire FTE pool to make the determination whether or not you are subject to any reduction in forgiveness for failing to bring your FTE count back to full strength prior to the submission of your forgiveness application.
  1. Wage Reductions
    1. When determining if you have reduced wages more than 25% for purposes of forgiveness reduction thresholds, you look at only the wages and salaries, not tips, bonuses, commissions, etc. If you kept your employee’s salary at $50K a year, but they usually make a commission and bonus of $100K, and all of that was lost due to lost sales, that loss or “cut” in pay does not impact your forgiveness calculation. The only cuts that would impact your forgiveness are cuts to the base pay of $50K (in this example).
    2. Same for hourly employees. You look at the hourly wages paid. Thus, if you are paying an employee $10 an hour prior to the pandemic and you pay that employee $8 an hour using PPP Loans, then that is only a 20% reduction in pay and that would not impact your forgiveness calculation. However, if you reduced the hourly wages to $7 that would impact your forgiveness and you would have to run the forgiveness reduction calculation in the Forgiveness Application. Again, as noted, tips and the like are not included when determining the 25% reduction rule.
    3. When reviewing this calculation, we strongly recommend you review the linked August 4 FAQ as well since it provides various examples that may be helpful to your specific situation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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